Question 23M.1.HL.TZ1.1
| Date | May 2023 | Marks available | [Maximum mark: 25] | Reference code | 23M.1.HL.TZ1.1 |
| Level | HL | Paper | 1 | Time zone | TZ1 |
| Command term | Discuss, Explain | Question number | 1 | Adapted from | N/A |
Explain why, in monopolistic competition, abnormal profits can be made only in the short run.
[10]
Refer to Paper 1 markbands for May 2022 forward, available under the "My tests" tab > supplemental materials.
Answers may include:
- Terminology: monopolistic competition, short run, abnormal profit, barriers to entry.
- Explanation: of the short run profit-maximizing position with abnormal profit being made; and of the long run position being affected by entry of new firms, resulting in decrease in demand for existing firms, with abnormal profits being eliminated and normal profits eventually being made.
- Diagram: short run and long run monopolistic competition diagrams.
Assessment Criteria
Part (a) 10 marks
Assumptions of monopolistic competition firms appeared to be understood by most candidates who attempted this question. Short-run abnormal profits were well-explained by most with generally correct diagrams. However, some candidates did not explain well the long-run adjustment to normal profits. There was also some confusion between the diagrams for perfect competition and monopolistic competition.
Using real-world examples, discuss the view that monopolistic competition is a more desirable market structure than oligopoly.
[15]
Refer to Paper 1 markbands for May 2022 forward, available under the "My tests" tab > supplemental materials.
Answers may include:
- Terminology: monopolistic competition, oligopoly.
- Explanation: of the view in terms of the possible benefits of monopolistic competition as compared to oligopoly; e.g. less market power for producers who face more elastic demand curves, more product variety, freedom of entry for new firms, normal profits in the long run; and in terms of the drawbacks of oligopoly such as collusion and the possibility of higher prices.
- Diagram: collusive oligopoly diagram showing more significant market power compared to monopolistic competition; relevant use of monopolistic competition diagrams (less market power).
- Synthesis (discuss): a challenge to the view in terms of the possible advantages of oligopoly over monopolistic competition, such as economies of scale and R&D; non-colluding oligopolies can be allocatively more efficient than monopolistically competitive firms in case of a price war; benefits for consumers of non-price competition (eg advertising) occurring more significantly in oligopoly.
- Examples: real-world examples of markets which are characterized by either monopolistic competition or oligopoly and their benefits or drawbacks.
N.B. It should be noted that definitions, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
Assessment Criteria
Part (b) 15 marks
Better-prepared candidates were able to discuss and show a clear understanding of the advantages and disadvantages of both market structures. Some candidates made mistakes in discussing allocative efficiency and why abnormal profits are possible (or not possible) for the two types of market structures. The better-prepared candidates noted the benefits of oligopoly market structures such as the benefits arising from economies of scale and from expenditures on research and development but some weaker responses focused exclusively on the benefits of monopolistic competition and the disadvantages of oligopoly. Only the best responses distinguished between colluding and non-colluding oligopolies in their evaluation.